Khushboo ltd is a company dealing with different fragnances. Recently the financial manager of company has decided to reduce credit limit and duration of credit to wholesaler keeping in view the growing quantum of bad debts . Identify the related decision and factor involved
Answers
Answer:
Working Capital/Short-term Investment Decision
It refers to the amount of capital required to meet day- to-day running of business.
It relates to decisions about cash, inventory and receivables.
It affects both liquidity and profitability of business.
Capital Budgeting Decision/Fixed Cappital/Long-term Investment Decision
It refers to the amount of capital required for investment in fixed assets or long term projects which will yield return and influence the earning capacity of business over a period of time.
It affects the amount of assets, competitiveness and profitability of business.
Factors Affecting Capital Budgeting Decision/Long- term Investment Decision
The expected cash flows from the proposed project should be carefully analysed.
The expected rate of return should be carefully studied in terms of risk associated from the proposed project.
Different types of ratio analysis should be done to evaluate the feasibility of the proposed project as compared to similar projects in the same industry.
FINANCING DECISION
Financing Decision: Definition
Financing decision relates to determining the amount of finance to be raised from different sources of finance.This decision determines the overall cost of capital and the financial risk of the enterprise.
Types of Sources of Raising Finance
Owned Sources
Equity shares
Preference shares
Retained earnings
Borrowed Sources
Debentures
Bonds
Loan from bank or financial institutions
Public deposit
Considerations Involved in the Issue of Debt
Interest on borrowed funds has to be paid regardless of whether or not a business has made a profit. Likewise, borrowed funds have to be repaid ata fixed time.